Understanding your business’s priorities is more important than understanding its capabilities

Ask senior executives what their organizations’ capabilities are and you’re likely to hear a laundry list of details about technologies, markets and products. Ask them what their organizations’ priorities are and you’re likely to hear vague platitudes or trite mission statements. While there’s no minimizing the importance of understanding how your organization creates value — its capabilities — it’s even more important to understand what it does — its priorities.

Why are priorities more important than capabilities? Because priorities define the constraints on your business; how many times have you pondered what your organization is fundamentally incapable of doing? Understanding the limitations your priorities impose on your organization has profound implications for strategy and innovation.

Before we discuss how your priorities impose limits on your organization, let’s explore the elements that constitute organizational priorities and capabilities. The term business model is one of the most ambiguous terms in the management lexicon. In the Building and Sustaining a Successful Enterprise (BSSE) course, we use a four-box framework that illuminates how organizations create and capture value.

The business model consists of the Value Proposition — the product or service it delivers to customers, its Resources — the people, technology and so forth that it uses to deliver the value proposition, its Processes — the patterns of interaction and ways of working that convert raw materials into finished goods, and its Profit Formula — the margin structure, scale and asset velocity required to earn an attractive return from its activities for investors.

Each of these elements must work in conjunction with every other element; they are “interdependent” as we say in our course. This interdependency makes a successful business model extremely difficult to copy but it also constrains the organization by limiting the range of possible approaches each company can take. Interdependency is the reason that strategists say businesses have the option to pursue either a low-cost or a differentiation strategy, but not both.

This discussion focuses on the differences between capabilities and priorities because of the implications they have for corporate transformations. Capabilities constitute the organization’s resources and processes. They consist of the physical plant, technology, employee knowhow and customer relationships that form its resources as well as the patterns of interaction that constitute the organization’s activities. The business’s priorities are its value proposition, as expressed through the Job to be Done it fulfills, and its profit formula, how the business is organized to make money.

Priorities are most important because they direct the organization’s focus. Activities that are consistent with the priorities will be pursued while those that are not will be shunned, no matter how strategically important or how much the senior management attempts to push, prod and compel the organization to pursue them. The organization translates its priorities into activities through the firm’s resource allocation process. The resource allocation process functions like a scale that weighs investments of the organization’s resources including people, money and time against the counterweight of its priorities. Activities that improve the business’s delivery of its priorities are funded with resources while those that do not languish.

Determining whether an opportunity fits your priorities

This brings us to the crux of the conversation: how do managers determine whether an opportunity for a new product, a strategy or a potential activity is consistent with the organizations priorities? There are two key aspects to consider, based on the elements of the business model.

First, evaluate whether the opportunity improves the business’s existing profit formula. Does it help the business to increase its margins, average transaction sizes or addressable markets? The greater the degree to which it improves the profit formula by improving on aspects such as these, the better it aligns to the existing priorities.

Second, evaluate whether the opportunity is consistent with the Job to be Done that the business fulfills in customers lives. Does it improve the business’s ability to serve the existing job in the ways that it is currently organized to fulfill it, or does it require the business to develop radically different solutions or serve an entirely new job? The more that the opportunity reinforces the existing job and how the business fulfills it, the more aligned it is with the customer value proposition.

If an opportunity is severely misaligned with one or both of these aspects of the business’s priorities, the business will be unlikely to allocate resources in pursuit of the opportunity. The opportunity will lie outside the boundaries imposed on it by its priorities.

Managers should not abandon hope for fulfilling those opportunities, however. While the existing business is unlikely to capture the opportunity, every company has the ability to create a new, autonomous unit that is directed towards serving the new opportunity. With funding provided at the corporate level and the freedom to develop its own priorities, the new business will be able to pursue opportunities outside the bounds of the existing organization’s priorities.

It’s tempting to set boundaries based on capabilities because they seem like such obvious enablers and constraints. Opportunities that build on our existing capabilities must be best and easiest to capture, the conventional wisdom tells us. The reality is that the boundaries imposed by constraints are soft and short term; if an opportunity that is commensurate with our priorities requires a new capability, the business will invest to create the capability.

Consider the case of Boeing and the transition from piston- to jet-powered aircraft. Boeing was the world leader in piston-powered aircraft but it wasn’t the first to introduce a jet airliner; that distinction belongs to the British company de Havilland and its Comet. While the introduction of jet technology required Boeing to develop new capabilities that were quite different from its existing capability set, the jet engine was completely aligned to its priorities. Jets allowed airliners to fly higher and faster with greater payloads which made air travel more comfortable and expanded the market opportunity by making it more affordable. So Boeing rapidly built the capabilities to build jet-powered aircraft and introduced its industry leading 707 only a few years later. Similar stories appear throughout the annals of business.

There are also many examples of companies developing ground-breaking technology but failing to commercialize it even after a different company builds a wildly successful business from it. Xerox PARC is perhaps the most famous example, having developed both the Graphical User Interface and Ethernet technologies that brought great success to Apple and 3Com, respectively. Clearly the capability wasn’t a problem — they invented the technology — but Xerox never commercialized them because they were inconsistent with Xerox’s priorities. They didn’t improve how Xerox’s customers used their products or make Xerox more money in the way it was organized to, so they languished.

Managers are wise to keep their priorities at the center of their analysis when developing strategic plans and evaluating innovation opportunities. Opportunities that are inconsistent with a business’s priorities will languish unless they are housed in an autonomous unit that creates new priorities consistent with the opportunity.

For updates and more of my thoughts, follow me on Twitter and connect with me on LinkedIn.